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Financial vs Managerial Accounting – MBA Mondays with Darwin

by Darwin on February 13, 2011

Financial vs Managerial Accounting is the subject of today’s MBA Mondays. I don’t know about others with an MBA or those who got an MBA online, but I have to admit that when I started getting my MBA, I was a bit surprised and confused to see two different Accounting courses on the syllabus. I had figured Accounting was a single subject. I didn’t take it in High School or College and had heard about the dreaded “debits and credits” but that was about the extent of my knowledge. I quickly learned there’s a big difference between to two.

Financial Accounting vs Managerial Accounting

Financial accounting is employed to generate the types of reports you may have seen as a retail investor when evaluating a company – The Balance Sheet, Income Statement and Statement of Cash Flows. These are the three primary documents filed quarterly or annually by publicly traded corporations in the spirit of full disclosure and transparency. Aside from just “numbers”, these documents often outline some of the less tangible information, like explanations of “one-time items”, risks of material impact to the corporation and such. These statements must be reported according to Generally Accepted Accounting Principles (GAAP), even though many companies will highlight non-GAAP results on investor calls as they’re actually more meaningful in some cases. Regardless, these reports are heavily scrutinized and regulated by entities such as the SEC and the GAAP principles are derived and modified by the FASB.

Conversely, managerial accounting is a totally different animal. The discipline has nothing to do with public reporting of historical financial results. It is more about internal visibility, modeling and presenting a picture to company decision-makers and executives about various financial aspects of the company. Financial assessments may include proposals for a merger or acquisition, Net Present Values of various projects, marketing projections, network rationalization projections, impact of potential legislation and tax changes and other modeled information to help inform management of prospects and risks. This information is assembled and presented internally only and is not subject to regulation. So, repeat:

Financial Accounting – External, for Shareholders, Governed by Regulations. Based on a historical snapshot.

So, if you’re taking courses in both financial accounting and managerial accounting, expect to be looking at completely different coursework, each of which having some relevance to business, investors, running a business, profit and loss and presentation of information. But the audience, focus, timeframe and regulatory scrutiny are vastly different. Personally, I’ve found managerial account measures to be more helpful for both my professional and personal endeavors since it is focused on modeling and projections as opposed to reporting and looking back and past results. However, each has value as you move around within a company. If you have the choice, I’d probably recommend taking both, but if you had to pick one elective per se, think about which type of role you see yourself in within the next 10 years and focus accordingly.

I took both in my undergrad days, and eventually passed the CPA….and then moved on to an MBA where I took more finance classes. My perspective is that for the person who won’t go into accounting but wants to have a business degree (either UG or Grad), it’s good to take both. Accounting helps one understand the language of business, and grounds people who might otherwise only think of sales and revenue growth.

Ultimately, I tend to look at things more in a cash flow basis. I think this viewpoint of mind came from doing so many discounted cash flow analyses that I now am conditioned to view things based on cash flow.